India’s foodgrain management problems are well known. Shortage of proper storage space, difficulties in managing a huge stock and countrywide operations are a challenging and increasingly difficult task. In this scenario, exploration of new solutions is necessary.
Yet, as reported in Mint on Wednesday, the country’s main food management agency, the Food Corporation of India (FCI), shows marked reluctance to explore the futures market to solve some of these issues. In India, however, the use of futures is looked at suspiciously.
A cursory look at the quantities and prices involved shows the scale of FCI’s problems. At the moment, the agency sits on a mountain of foodgrains: 38.2 million tonnes (mt) of wheat and 33.3 mt of rice, way above buffer stock requirements. Not only that, the cost of maintaining these stocks is huge: the gap between the minimum support price (MSP) and the economic cost—the cost that includes storage, carrying, interest and tax costs—of these grains has increased over the years. In 2011-12, this gap in the case of wheat was Rs 482 per quintal, or roughly 41% of MSP (including bonus). In the case of rice, the figure is a whopping Rs 1,074, or nearly 97% of MSP.
Clearly, these costs are ruinous in the long run and instead of incurring them year by year, it is better to reduce the mountains of foodgrains. It is not that officials are unfamiliar with the workings of the futures market: there has been at least one instance when a futures deal was executed but in secrecy.
The reason for this is clear: there is a great deal of political opposition and suspicion about futures trading, especially in agricultural commodities. Politicians often blame spikes in spot market prices on futures trading. It is of interest to note that just about the time the government entered into its first wheat futures deal, it also appointed a committee led by Abhijit Sen to find out if futures trading leads to increases in prices of these commodities. The committee found no conclusive evidence for the alleged cause and effect. FCI should take heart and explore futures as an instrument to solve its problems.
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